Food Inflation in Russia is Unsustainable
Jeffrey C. Borneman | February 20, 2015
"Food prices (in Russia) surged 21 percent in January, the most of any month since 2008, government data show," reports Bloomberg Business. But there is even more serious news exacerbating the problem: Higher borrowing costs have killed the loan market, truncating any capacity for local expansion and production.
Russia is attempting to put the best face possible on rising food costs. " Prime Minister Dmitry Medvedev said in August that the trade bans would usher in a new page for domestic farmers to achieve self-sufficiency," but Russia, the world's fifth largest importer of food (with imports constituting 50% of consumption), has had anything but a smooth transition to food self-sufficiency. The crashing rouble combined with a wind-shear drop in Energy revenues has only added to the difficulties of producers wishing to fill the food void.
"The problem is finance," said Bjoerne Drechsler, president of the Moscow unit of GEA Farm Technologies. The Russian government has been compelled to intervene to "help keep expansions of food-production capacity on track by distributing affordable loans" of some 13 billion roubles ($207 million) from the Russian Agricultural Bank.
What is the takeaway for investors? A hungry citizenry will tend to pressure its leadership to make numerous adjustments; a people experiencing hunger will be inclined to riot and blame their government for their woes. To date, Putin has done a masterful job of directing the ire of the populace toward "the West" and shifting the blame for inflation and sanctions away from his own government.
Nevertheless, the question remains: What can Putin do to replenish the State's cash coffers, thereby boosting the rouble and lowering borrowing costs? The answer remains unchanged from the start of the price plunge in Energy last fall: Cut the supply of Energy from the Middle East. The trick is do this covertly through proxies as Russia has made it clear it does not wish to face NATO in any military conflict.
Investors should take care to note that three of the four market sectors of MDEF™ are center-stage in this particular geopolitical Chess Match and without relief soon, the average Russian will be unable to afford food.
If you want to know more about how the MDEF™ Investing strategy is positioned in this, or other geopolitical possibilities, please contact us directly.